Corporate failures grab the headlines but they also drive regulatory change. Do reforms make a difference? One set of researchers suggests that it is “informal” governance expectations that may make the bigger difference.
An examination of UK corporate failures suggests that corporate failure is less likely when a board’s “social network” is large, its managerial network small and its executive pay levels are relatively low. It also helps to have a “non-independent” nominations committee.
The conclusions have been drawn by a team of academics from Belfast, Bristol and UEA which looked at 272 corporate failures over a 16-year period from 1999. They were compared with 272 healthy firms over the same period matched by size and sector.
On average, a large social network could reduce a company’s potential for failure by around 9.9%, according to statistics put together by the team. That figure could rise to 13.2%, if the time span is increased.
“This finding is in line with social network theory which suggests the larger the social network amassed over the director’s lifetime, the greater is the director’s ability and talent to manage a firm safely and prevent corporate failure,” the team writes.
The team also finds that higher executive pay is associated with a higher potential for failure, on average 12.5% or 14.6%, depending on the time spans involved. The team write: “These findings also suggest the negative impact of high executive pay and are consistent with previous empirical studies finding that executive compensation is negatively related to firm performance and, in turn, leads to corporate failure.”
Diversity and company failure
There is a diversity angle too. Increased boardroom diversity seems to make little impact on a company’s survival prospects. The conclusion they draw from the statistics is that the UK governance code’s demands for improved diversity should be “seen as intended for fairness and equality reasons, but not for real effect on company endurance”.
Corporate failures also seem to rise when nominations committees are not independent. There are no strong findings on audit committees one way or the other. The team concludes that there may be an “overemphasis on the effectiveness of the monitoring role” of board committees.
The results will fly in the face of many assumptions about corporate governance, though the efficacy of high executive pay levels has been questioned for some time and for a number of reasons.
One development to surprise many observers is how executive pay looks to have rebounded after the pandemic, while some researchers argue that, in the US at least, it never really suffered.
Elsewhere, recent research has questioned the basis on which claims can be made that diversity improves performance.
This latest probe suggests there is much to learn about governance and how it affects board behaviour and the prospects for company longevity. There may be work yet for regulators and directors alike.